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Alan Lakey: Why my clients won’t pay a fee

Having discussed the pro’s and con’s of the RDR with numerous industry stalwarts such as Roderic Rennison and Danby Bloch, I decided to bend to their considered opinions and test the imminent adviser charging experiment on my clients.

I selected carefully. I decided that to start with I would focus on lump-sum investments. I felt that a gentle introduction would be best so as not to terrify existing clients who might need to be weaned off the “free advice” they had been happily getting for over 25 years.

This translated into our old friend the commission offset model whereby I would estimate the time needed to provide the advice and would then transform the resulting time into a fee. The fee would be chargeable if the clients did not proceed but if I received any commission on the investments, this would reduce or wipe out the fee.

Enter Mr&Mrs B, she a legal secretary and he a golf club green keeper. Clients for 15 years, they had recently sold their property and were in receipt of £110,000 that they needed to invest with a focus on retirement income. Despite a broken leg, Mrs B and her husband braved the ninemile journey and they respectively hobbled and strode into my office.

Their desires were typical in that they evinced a cautious approach to investment but wanted growth beyond that available within deposit accounts. They had a 15 to 20-year timeframe and no requirement for pre-retirement income. Also, they each held pension plans invested in equities and fixed interest.

The discussion went well and I explained the novel method of charging that I now operated. I informed them that the FSA, which knows all about these things and is a force for the general good, had decided that it was in their interests for me to operate in this trans-parent manner and that they would be enfranchised. They nodded and made the appro-priate noises, no doubt silently thanking the denizens of E14.

I explained that their requirements would likely be met by a diversified portfolio of cash and investment Isas, high-interest accounts, National Savings & Investments, investments bonds and additional pension funding. I advised a fee of £750 which would be reduced or wiped out by any commission received.

A week later, they emailed explaining that they had sorted it via the Nationwide Building Society.

Now let us consider this. These were long-term existing clients for whom I had arranged mortgages, a pension plan and various life health and redundancy assurances. Apart from two cash Isas with Barclays Bank, they had used my services for every financial matter since 1996. They clearly trusted me and had made extraordinary efforts to visit despite the wife’s injury. The problem was neither trust nor lack of confi-dence that I could provide the solution, it was the fee.

These clients, like the majority of consumers, had not pre-viously paid or even discussed payment of a fee. Despite working for a solicitor and under-standing the fee structure, Mrs B did not feel comfortable with the idea. Of course it might be that it was because she worked for a solicitor that she did not feel comfortable.

So, having rejected the new customer charging world, they scurried down to Nationwide, which we know is tied to Legal & General. No doubt the nice man at Nationwide arranged a portfolio of investments with far higher charges and comm-ission than anything that I would have arranged with my 3 per cent maximum comm-ission stance. If these clients are typical, we will inhabit a very different world in 2013.

There are plenty of office parties and Christmas events going on at this time of year. But have no fear – you can still stay healthy while going out and enjoying yourself, with a little bit of planning!

Along with all the other firms that provide advice on defined benefit transfers, we received our questionnaire from the FCA about the quantity and nature of cases we have handled since 2015. By the time you read this, the deadline for its return will have passed and those under scrutiny will have breathed a collective […]

18th December 201812:39 pm

Comments

There are 54 comments at the moment, we would love to hear your opinion too.

As usual, a well written article, though perhaps it was a mistake to hit the clients between the eyes with a fee figure of £750 right at the first meeting.

My approach would be to explain that the overheads of maintaining my business (and supporting the four-tiered costs of supporting the current regulatory structure, not to mention occasional supplementary charges as well) have become such that we simply cannot provide advice on a speculative basis any longer. As a result, we now charge an initial report fee, with the subsequent costs of implementating of our recommendations (assuming that’s what happens) covered either by way of deductible CAR (which will still be allowable after 2012) or a subsequent fee, as the clients may choose. So my initial fee would be, say, £375 ~ which might not cover fully the costs of all the pre-sale work and at which the clients might still baulk, but such a figure would be rather easier to digest than £750. And, once paid, there’d be a pretty good chance that the clients would proceed, for the simple reason that they would have already paid to get halfway there.

Some clients remain wedded to the idea that commission-based advice somehow doesn’t cost them anything and refuse point blank even to countenance the idea of paying any fee. But, in my experience, such people are a dwindling species and more and more are, in fact, prepared to pay at least a reasonable sum upfront for advice that, if it really is advice as opposed merely to a steer towards the sale of a product, cannot be provided on a speculative basis. I guess it’s a matter of how you sell the fee.

I don’t believe that what they got from Nationwide was advice they were simply sold a product. It may have had some advice bundled in with a product selling proposition but it wasn’t advice as it should be

I agree with Julian that more and more people are understanding that commission is not a “no cost option”. I do though think that if a client is told that they have to pay a fee because the FSA says so that might constitute a very good reason for not doing so!

If an advice fee is only not payable if they proceed to product implementation I am pretty certain that might also constitute a barrier to them saying “yes” Advice is a valuable item and Alan needs to be paid for the experience skill and expertise that he brings to the table but under adviser charging he does of course still have the option of doing the advice speculatively and only charging for implementation if he chooses to so in that respect the RDR changes nothing.

No doubt Alan will do what we all need to do and fine tune a proposition that clients value and are willing to pay for and if experience is anything to go by the more powerful the proposition the more times he will get a “yes”

Get Real! With Unemployment at 2.5m plus & real disposable income reducing by the day.Clients also struggling to feed & keep a roof over there FAMILIES heads – do you really suppose (without education of course), that average middle class Britain can afford or even contemplate paying fees!If they valued & understood it – maybe – but in light of all the scare stories & perception of Financial Services in general -As IFA’S we haven’t got a SNOWBALL’S IN HELL chance of making a viable & practicle living post 2012!If the ever increasing Exams don’t get you – the lack of reasonable PROFITABILITY will! The FSA or equivalent will make sure of that!They want the BANKS to succeed to repay all that lovely Taxpayers DOSH!

I believe Alan actually did the ethical thing by being totally upfront with the clients about the fee.

We are constantly being told, by people like Nic Cicutti that we should not be salespeople, but Alan is getting criticised for not selling the fee proposition correctly. You can’t win sometimes.
I have also put the fee proposition to a few long standing clients, last year, and they were not keen to change the way I have done business for them at all. Unlike with solicitor’s legal work lots of the public think they can do it themselves, when it comes to investing, and of course they can, although they often make a mess of it.

With the rules as they are, at the moment, I have taken to explaining to clients that they can either pay a fee and I will subsequently charge them for all the work carried out on a hourly basis, or I can be paid by commission, which will still come out of their money and I won’t present them with a bill for any other advice or queries they have in the future, so they won’t have to hesitate to call me at any time.

Well, the apologists for RDR are obviously going to point out that from 2012 Nationwide would have had to disclose its fee as well. And they have a point. Why give up a competitive advantage before it’s actually necessary?

It’s a bit like offering unisex annuity rates to men before the EU sex discrimination law comes into force, and then wondering why half your customer base has gone elsewhere. It’s no use bleating that it’s “the right thing to do for the consumer”, the regulator set a date, your competitors are going to wait for it and so should you.

Of course, the problem is that RDR won’t force Nationwide to disclose the fees you pay them for keeping the money on deposit – the ones hidden in the interest rate – so even after 2012, this problem won’t go away, people will just get ripped off via the mechanism of inflation and interest spread rather than commission.

It should have worked because the clients were being offered commission rebates to cover the cost of the fee. However, post RDR there are no commissions to rebate. There are therefore no fee based advisers at this time, and pro RDR IFAs who think they offer a fee based service now, and think they are RDR ready, and think they will survive post RDR and the competition will diminish, do not, as far as I am concerned, understand how business works. Pro RDR advisers are attempting to base a business model on the ridiculous notion that they will perform marketing and distribution on behalf of product providers free of cost to product providers. Ever since the mid 90s this cost to product providers has been disguised as “cost of advice” paid for by clients.

We find that once a client understands that the long term charges are significantly lower by using ‘wholesome, non-commission products’ that generally go on to save them thousands of pounds in the long term, they are more than happy to pay a fair single fee for this valuable advice.

In the face of this evidenced cost saving, if a client insists that they would rather have it ‘free now’ and then pay well over the odds over the long term – they are most likely better suited to Nationwide!

I have just inherited a client who was going to be charged £400 to be told whether he should opt in or out of S2P in connection with an ‘opted out’ policy. 2 years later he hasn’t made a decision because he couldn’t afford the ‘advice’. Welcome to the post RDR world.

I work in insurance, can you imagine the reaction if I started charging a fee for arranging car insurance – even if I said that I would deduct the commission from the policy I arranged?

The average premium is £800 or so, so I would get £80.00 commission on a policy – if the customer took it out. Would anyone pay £10.00 to obtain a quote from me and then £30.00 to arrange the policy if they wanted it? Would you?

They might be a’dwindling species’ but regretfully they are many and my experience is the same. Thus far it has resulted in substantial loss of income. I remain in full support of charging fees, but its hard work, and only the blessed few have no trouble with the idea. I could be wrong, but if advisers, as a whole, had a plan we all stuck with collectively we might at least get past the starting gate.

I think you have just highlighted what we have all been thinking. The FSA believe that we should charge fees so we can be on a level playing field with solicitors and accountants. Unfortunately solicitors and accountants do not have a competitor in the shape of banks. People obviously expect to use and pay a solicitor as usually it is a requirement and the results are easily quantifiable. Similar to an accountant where it may be a legal requirement to have audited accounts. The public already have a fee based option if they opt for it but we all know the vast majority prefer commission. If you are dealing with HNW clients then usually they understand the rational of fees and are willing to pay for the service. The ordinary man on the street does not. Is it to late to stop the FSA destroying our industry?

An existing client approached me recently, he wanted to save £200 per month for three tears or so. He wouldn’t have to disinvest for some years after that. I offered to test his attitude to risk and recommend an initial spread of funds that were suitable. I would charge 3% plus 0.5% fund-based, and a one-off charge of £100.
Guess what? He’s not prepared to pay the £100 and I can’t afford to carry out the work for anything less. Impasse, I’m afraid.
Thanks FSA for making life impossible. And that’s for advisers and the public alike.

I cannot say that I am surprised that Alan didn’t achieve a a desirable outcome. For one thing, I don’t think (judging from everything Alan has said and written in recent years) that he actually believes fees will work for him. So walking into a meeting with that thought will (on some level) have an impact. Deep down he probably wanted to fail just so he could justify his position. I imagine he would have been gutted had it worked 🙂

I’m not trying to have a go at Alan, and I hope he knows that, but shifting a business from commission to fees isn’t easy, even if you’re 100% pro fees. The conversation with clients is different, and understanding what will turn a client on to fees rather than off, is often very subtle. Telling someone that the FSA is twisting your arm to go down the fee route isn’t a convincing argument. OK so maybe I’m paraphrasing a little too bluntly.

I think I know what I’m talking about, and over the past 5 years I’ve made so many mistakes when introducing fees. That’s despite being an early adopter, I set my business up to operate solely on a fee basis.

Sometimes you feel you really are banging your head against a brick wall, until you step back and view the conversation from the clients perspective, not from what we think they want to hear.

I admire Alan for taking the plunge (particularly given his anti-fee stance), and hope he’ll keep on working at it. Anyone who thinks that they can simply make the switch come 2013 is deluding themselves – it’s not a walk in the park. It takes practice, and there’ll be more mistakes. Sometimes it’s the tiniest things that cause a client to shift one way or another.

As ever, Nick Bamford’s comments are ones that I agree as well as some of the others but there are few of my own that you may – or may not – find helpful.

First, I would want to find out why your clients went to the Nationwide for advice. Was it as you imply, because they were scared away by the fee or for some other reason.?

I suggest that you get your partner, who I think is your wife, to call them and say that you are always intesrested to find out why clients do not proceed with your recommendations.

Client research is an activity that most intermediaries do not undertake and this is a mistake in the context of building robust propositions in relation to Adviser Charging. Once you are clear what elements of the services you offer that your clients value most, you can target your proposition(s) accordingly.

Second, I do not think that the amount you were quoting as a fee was excessive. Indeed, as Nick recently stated in an NMA article on the subject, charging too little will put some clients offas they will not believe you can deliver the service for the sum quoted! Rather, I suspect your clients may nor have fully understood what you were going to provide for the sum quoted and this highlights the need for intermediaries to be able to clearly articulate what the client is going to get.

Finally, there is a difference in relation to fees/Adviser Charging between dealing with existing clients who have not paid “real money” but who have rather paid you via commissions and new clients. The approach needs needs to be tailored to explain carefully how they have paid in the past and why Adviser Charging with its transparency is advantageous.

Adviser Charging is coming, I would not advocate what one respondee is suggresting namely to do nothing until 1st January 2013 not least because it’s important to put systems into place and ensure you have thought throufgh all the issues and objections. Otherwise, come January 20143, you may well find a sharp initial drop in income. The press will also be brieing your clients so it will pay dividends to implement the changes that you need to make in advance.

Keep persevering. Planning and practice are the key but the two most important words in this context remain “confidence” and “value”. To be successful you need to be confident in what your are delivering to them and your clients need to believe what you are offering represents value.

2. The fee explanation given was confusing – so much so that a “loyal” client of 15 years went to the Nationwide

3. The clients had no idea of what this new conversation was about and probably felt this was new charge being put on them after so long of trusting

What the above shows is this:

1. It is crucial to explain what you are doing, and why, in simple terms

2. Clients must always be shown a comparison of how commission works against a pure fee

3. Nothing of intellectual value should be given for free, or made to be thought of as free, unless it is work for done the CAB

As Dennis says, maybe Alan went in with a different mindset. However, this is just one experience which shows us that (many) clients had no idea about fees/commissions and just trusted their adviser. It shows how trust can be broken unless careful attention is given to what is said in this new world.

What it also shows is that a better explanation would have invariably resuslted in client retention and satisfaction. If you can’t explain your value, no one else will guess it.

Good piece Alan,
I have had the same resultant rejection of the fee model from both long-standing and new clients alike.
Even when I have showed the client the better outcomes, from the upfront fee model against the pre loaded establishment charge model, there is a reluctance to pay what is seen to be excessive fees for a 90 minute meeting. Yes I explain the work involved behind the scenes, yes I explain the costs of running a practice and yes I am a competent communicator who can make himself fully understood, yet it is the reluctance to see a cash amount set aside from the intended investment pot being siphoned off before the money is put to work that clients object to. Yet talk about a 5% bid/offer spread and a 1.75% establishment charge and they are happy in their ignorance.
When long term clients question the need to charge £750.00 to arrange several contracts for a £110,000.00 capital investment, what chance do you have of making a living at 0.75% initial charge and perhaps 0.5% trail commission? It can only be down to the break from the advisory joint conspiratorial nature of our current business models, whereby the client feels safe in the knowledge that they have someone to blame if it all goes wrong and someone to hold their hand through the mind-boggling decision making processes that are required who, although they get paid by the provider, is trustworthy enough to warrant that payment.
For the 20 year + IFA in a small practise I think it highly possible that it is the personal nature of the way we interact with our clients that is the stumbling block, once the payment is from client to adviser there is a direct link with the advice and who to blame if it all goes wrong, without any provider / third-party involvement to soften the facts or blur the nature of a complaint. We paid you, not the provider, therefore if it all goes wrong we won’t be dealing with an unknown entity at the end of the phone, we must confront someone with whom we have shared our confidential financial and emotional thoughts and feelings, invited into our home, socialised with and hold in high regard. After all who likes to complain to a Solicitor or Doctor?

We have recently made the switch to fees/CAR. We segmented our client bank and wrote to them all offering them three service levels. I was really surpised by the results. Some clients that I was sure we’d lose (as they aren’t very wealthy and so the fees to them are substantial) have stayed with us and indeed complimented us on the totally transparent way we’re now doing business, which hase been really pleasing.

On the other hand, some clients who can well afford our fees and for whom we can add serious value are less enthusiastic and dragging their heels. One, who has been a client for 15 years, asked me if there’d be a discount for loyal long-term clients. I told her that she was very welcome to a discount but that in order for us to make a profit we’d have to reduce the service provided. She signed.

Charging fees (and we still have lots to learn) reminds me of the Henry Ford quote – ‘Whether you believe you can or believe you can’t, you’re right’!

Maybe I should clarify something that may become ‘fact’ if it’s not stopped in its tracks (a bit like the FSA’s RDR evidence).

I have no problem with fees. In fact, I would dearly love it if all of my clients agreed to pay me a retainer or a one off fee for every piece of work. Currently I provide lots of ‘free advice’ for clients where there is no realistic means of charging them. I do this in the knowledge that I will earn from them at a later date.

In this particular instance I was shcked to find that the clients had gone elsewhere and, no Dennis, I was not happy to have my fears confirmed.

The point of the article was to highlight that, despite the FSA’s theories being forced down our and our clients gullets, the concept of fee-charging does not sit well with a sizeable section of the population.

Maybe they will warm to it, maybe they will go online, maybe they will visit bucket shops, maybe they will do nothing. Events will determine.

Alan, I’m happy to be corrected about your stance toward fees and retainers. Thank you for the clarification.

Should we be talking about fees though? The terminology is Customer Agreed remuneration isn’t it? Whatever that means. Yet another ill thought out piece of terminology from our regulator.

CAR? I hardly think that accountants or solicitors allow their clients to ‘agree’ the fee, as though there was some idea that each client can negotiate what they think is agreeable. Our schedule of charges is established before the cleint walks through the door isn’t it? Yes they may be some discussion and some room to manouvre, particularly with higher value work, but CAR, that’s creating expectations that shouldn’t really exist.

I would like the FSA (or FCA) to establish a form of CAR regarding my fees and levies. Fat chance.

I also agree with you Alan that fees as they are presented do not sit well with a large proportion of the UK population. But they can be brought round if it is presented differently.

Finally a reply to Ken Durkin who says that there’s no such thing as a fee only business. Take the blinkers off Ken – some firms like mine choose not to write protection business, don’t write traditional life company business, and on the rare occasions we do see commission free terms or go elsewhere. We also use institutional funds and ETF’s rather than commission based retail unit trusts. I know that we’re not the only ones.

When I say there is no such thing as a fee based IFA, I am talking about IFAs, not unit trust advisers masquerading as IFAs. And even unit trust advisers have to accept the fact that if a client goes direct to a unit trust provider they don’t get the product any cheaper. There is no such thing as a fee based IFA. Period.

As they say it’s all in the presentation. However these clients must be a thick as tow short planks if they didn’t understand. (Provided it was explained properly).

If they were shown that if the bought a bond their £1,000 would actually have £950 invested (full allocation merely means a bigger hit on early surrender) – they may possibly have viewed things a little differently.

Anyway I have been charging fees for years with absolutely no difficulty. I think over 15 years perhaps one or two may have railed – but I regard that as no loss, I donm’t want clients who are either thick or don’t value my service. All existing clients are perfectly happy. Oh and by the way John Wood – I also have a General Insurance department that actually does charge fees on a regular basis (not always -s admittedly) – for car insurance and most other personal lines. Again no problem. Customers know and value the fact that we provide a service and are happy to pay.
If you aren’t confident with your value and with fee charging it is hardly likely that the client will be comfortable. All this nonsense about the Regulator forcing your hand merely underlines your unease. To plagiarise Cheryl Cole – “Mr Client this is my fee – because I’m worth it!”

Ken, with all due respect, I disagree with you. I don’t know where you are coming from so perhaps you could enlighten me – what exactly is a Unit Trust Adviser? Are they tied? Who regulates them, the Unit Trust Association?

Are you really suggesting that anyone that specialises in investment isn’t an IFA? Does that also hold true for advisers that specialise in pensions, or protection. What exactly is your criteria for being an IFA (it’s probably worth noting that it’s your criteria), because no matter how hard I look, I cannot find anything in the rule book that says I’m not an IFA under my current model.

Additionally, I’m directly authorised by the FSA as an independent financial adviser, and unbiased have me listed as an independent financial adviser, seems like it’s just you that might have a problem with that.

I know of many advisers that specialsie in giving investment advice, all of whom are IFAs. If we’re missing some vital information be sure to let us know.

And another thing, your comment about having to accept the fact that if clients go direct they don’t get the product any cheaper – how does that affect whether someone is an IFA or not. It might be a legitimate claim, but it doesn’t have anything to do with your original argument.

I think Alan’s experience will sadly be typical. We started discussing these matters with clients, who all said that they were perfectly happy with things as they were and did not feel comfortable with a change.

We tried the long explanation, setting out how charges are taken and why fees would in the end be cheaper. No dice. Luckily we have a fair few VHNW clients who invest so much that only 0.5% of funds under management without any up front charge makes the business profitable. The 80/20 rules also works for us so in simple terms, the 80% non VHNW will either pay us or walk post RDR.

Advisers with non HNW clients had best start either cutting overheads big time, probably by cutting support staff and closing down offices, with all the service detriment that will result, or find another job. I also think that if the size of the job Alan describes was properly costed through, including business overheads, £750 wasn’t high enough to be profitable unless Alan works on his own from the back of a van.

The pre RDR world isn’t perfect I agree, but the thought of rivers of lambs heading to slaughter at the Banks is not good news. That’s what is going to happen however, so best to face up to it and take evasive action.

Its quite fascinating reading the responses to Alan Lakey’s article because, just like the FSA, so many respondents find it difficult to deal with the world outside the office door. And that remark doesn’t relate merely to this article.
By co-incidence when I opened my electronic note book to construct this response another article was open with the title “The client doesn’t matter”. And there is a feeling flowing through so much discussion that the client doesn’t matter.
The view points being expressed are about charging structures and what is right, ethical and commercial, and how to explain it all to the client
But there us no evidence that the FSA at any point did any serious research on the question of how the client wanted to pay for the advice/sales process provided. Nor did they determine whether any “commission” bias was meaningful or marginal (Alan Lakey has pointed out the Charles River report of 2005). Nor did they determine whether any other option would have a genuinely beneficial outcome.
When you go into a car showroom does anyone seriously believe that the car salesperson does it for free? Does anyone believe that the car salesperson is going to present the customer with the cheapest, most effective solution to their needs – e.g Sorry sir, we do not have that product, but the ABC car showroom down the road has just what you need. No Sir, having the sports extras are really just a waste of money. There are ethics, there is professionalism and there is commercial survival.
The FSA do not have to address any of those aspects, and I know that there are many people out there that would suggest the FSA have never shown those qualities themselves.
But we are having wonderfully fruitless arguments amongst advisers about how to address the problems the FSA have created. What Alan Lakey’s article demonstrates above all else is that no asked the customer!
What a healthy business sector should have is a full range of options – including self help. Even now it is becoming increasingly difficult for the “man in the street” to buy some products; insurance company web sites are constructed such as to make an ordinary purchaser feel unwelcome (I understand they are protecting themselves against the ravages of the FSA); there are many products that are unobtainable except through an IFA.
It really shouldn’t matter that much how we explain to a client how they will pay. I would even question why we have to tell clients what they will pay to the adviser. Do you know how much the car salesperson took on your car; how much the builder took on your house; what the mark up was on the suit you bought?
If the market were on a genuinely commercial basis the client would have a range of options – I’ll pay a fee; I’ll remain ignorant and let you take commission; I’ll go to Nationwide to buy life cover and to Alan Lakey for pension advice. A long time ago there was a survey that demonstrated that the life companies used by IFAs had significantly lower charges than the direct selling companies. Competition did work. And in my opinion the market was a lot more innovative.
Now it’s a bit like going to Church and being castigated by the parish Priest for being unreformed sinners.
Read those responses again and see how introverted we have become under the Canary Wharf Taliban.
The client no longer matters – Long live the Process.

Dennis, why are you wasting your time with Ken Durkin? It’s clear he’s thick – just like anyone who doesn’t understand the fee concept.

Apologies about my earlier comment as Anonymous (10.59am).

Alan, thanks for clarifying. As you say time will tell, but as Mr. Katz points out, if the fee concept is explained clearly, it’s hard for anyone to say no. I got a request last week to advise an individual who was taking early retirement from Royal Mail. He wanted to know whether the reduction in his pension was a good or bad decision.

He understood the fee concept and was happy to pay a fee….but could only afford £200. I felt really bad as I had to politely decline, but he understood.

I am all for fees but if it is going to stop consumers taking advice then surely this is not what the FSA or the whole economy wants.

I can see the day when no new blood can join the industry unless they have a large sum of cash behind them to allow them to live for the first 12-18 months.

How do we expect Graduates or business talented people to fill the gap of advice if you need say £40/50K to get you through this period.

Starting a business is not easy in this economic environment and will be even harder after 2012.

As for advisers having HNW clients whose trail/fund based fees cover the overheads new advisers will not have this luxury so perhaps the HNW advisers need to think how they see new blood entering our industry.

I can see more advisers working from a home base to reduce costs and perhaps outsourcing admin etc via paraplanners etc. This then impacts on local economies, and it continues to bring towns down.

RDR will certainly have a negative effect, we all know this and I think so do the FSA but they are not willing to reconsider some aspects.

I have enjoyed the comments from both perspectives. As far as I see it, transparency is the key, whether in terms of being paid commission or working on a fee. I always ask the client to acknowledge the income I will receive, in the case of commission by signing next to the commission declaration on the illustration / KFD.

Having worked in a fee-paying and commission paying environment for a number of years, my problem with fees stems from the fact that a client might choose NOT to contact me, as they think it will incur a fee or “the clock is ticking”. I relish client contact and actively encourage it. I regularly advise a client on National Savings or Cash ISAs, where I know I am giving “free” advice. If they think they’ll have to pay a fee, then they might choose not to contact me. The problem with commission has been both greed and the lack of transparency , i.e. how much is the advice costing the client.

I have apprciated the constructive comments made. Can I encourage more of them? I want to learn – I’m so NOT perfect, but my goal each day is to put the client first. It’s not easy, as we all know!

‘Why my client’s won’t pay a fee ‘ is a sentiment I agree with.However we need to move on to those that will. If there are 20000 advisers left after RDR each looking after a maximum of 250 clients that means we are at capacity at 5million. Given the population is 62million that is less than 10% market penentration. The future will be looking after fewer clients ,in greater depth and crucially people who appreciate your knowledge and skill.
Too many advisers have spent too long developing relationships that, as Alan has found out, are not commercially based.This is unsustainable.How can it be right the public expect life changing advice for free with all the obligations that go with it (FOS etc) I look forward to dealing with people who recognise my skills AND will pay for them. We are set to become e rare breed indeed isn’t it about time we capitalised on it ?

A very interesting array of comments here. Funnily enough, even though I’ve been operating on CAR for the better part of a decade now and yes, I’ve lost a few prospective clients as a result, I’m actually starting to encounter clients who, once they’ve written their cheque for the proposed investment, ask about writing a second cheque made payable to me (my firm). It happened just this very evening. At that point, I have to point out to them that we’ll be paid by way of the commission (deductible CAR) that we’ve just discussed and to which they’ve already agreed. How strange is that? Weren’t you listening, dear client?

I’m certainly no maestro at getting people to pay fees, but when you go out of your way to be open about how CAR works and the amount involved, it’s slightly unsettling to find that that some clients still think it means writing a second cheque.

Having said all that, I still think it’s best to present your fee for your pre-sale advice (itemise it so the client understands just how many bases you plan to cover), charge it upfront (if they won’t pay, then you have to write them off) and leave until your next meeting any discussion of CAR for implementation. That’s what I do and by and large it works.

Some input and clarification from the FSA could well be helpful (remember what the Code says on this subject), not least on these very forums (which is why I think the FSA ought to establish its own forums).

As I understand it, firstly you’re not going to be under any obligation to charge a fee, either for your pre-sale work or for implementation. Secondly, your CAR can still be by way of a deduction from the sum to be invested into whatever product/s you’re recommending, so there won’t, in practice, actually be much difference between that and CAC. If you practise the latter already and if you have difficulty getting clients to pay a fee for your pre-sale work, then you’ll be able to carry on much the same as now, namely doing the pre-sale work on a speculative basis which, to my mind, is no longer a sustainable business model.

The only distribution channels likely to experience any real difficulties with CAR are those used to taking excessive commissions without discussing them with the client ~ which, after 2012, they’ll HAVE to do. Alan may have lost these particular clients to a building society but, if the banks and building societies are forced to operate on CAR just the same as us, then after 2012 the clients will find that going to Nationwide or whoever won’t actually save them any money at all or, if it does, then paying less will mean getting a great deal less in return. Perhaps the only thing we really fear is fear itself.

Some nifty software is needed so you can show a client fee and non-fee options at this point.

From the comments, it is also clear that the mass middle market (which is the IFA’s domain) is not quite ready for this change.

I know of a company in London who has been charging fees for 10-years (commission offset) and is an incredibly profitable business. No.1 They only deal with people who have GBP1 million minimum to invest and No.2 Tend only to deal with lawyers and accountants. They have completely narrowed it down to the ‘market of least resistance’. Good for them of course, but not good for the vast majority of IFA’s I would have thought.

IFA’s are going to have to move up the food chain if they are going to make this work I think.

There are a few advanatages of being old and one major one is that I am old enough to retire and leave the mess behind me

But the fact is that you can take a fee from the product as we doi now

So as long as a client implements our advice we will still be paid

it is when they don’t implemenet it or the eadvice we give is to invest £15K in index linked National savings certificates

Or to research a pension transfer and the advice is to leave it where it is

With new Prospective clients this will not be a problem but wuth existing ones it is and this “sale” of the concept of fees needs to be sold carefully and correctly otherwise manty others may choose to retiure too.

Its quite fascinating reading the responses to Alan Lakey’s article because, just like the FSA, so many respondents find it difficult to deal with the world outside the office door. And that remark doesn’t relate merely to this article.
By co-incidence when I opened my electronic note book to construct this response another article was open with the title “The client doesn’t matter”. And there is a feeling flowing through so much discussion that the client doesn’t matter.
The view points being expressed are about charging structures and what is right, ethical and commercial, and how to explain it all to the client
But there us no evidence that the FSA at any point did any serious research on the question of how the client wanted to pay for the advice/sales process provided. Nor did they determine whether any “commission” bias was meaningful or marginal (Alan Lakey has pointed out the Charles River report of 2005). Nor did they determine whether any other option would have a genuinely beneficial outcome.
When you go into a car showroom does anyone seriously believe that the car salesperson does it for free? Does anyone believe that the car salesperson is going to present the customer with the cheapest, most effective solution to their needs – e.g Sorry sir, we do not have that product, but the ABC car showroom down the road has just what you need. No Sir, having the sports extras are really just a waste of money. There are ethics, there is professionalism and there is commercial survival.
The FSA do not have to address any of those aspects, and I know that there are many people out there that would suggest the FSA have never shown those qualities themselves.
But we are having wonderfully fruitless arguments amongst advisers about how to address the problems the FSA have created. What Alan Lakey’s article demonstrates above all else is that no asked the customer!
What a healthy business sector should have is a full range of options – including self help. Even now it is becoming increasingly difficult for the “man in the street” to buy some products; insurance company web sites are constructed such as to make an ordinary purchaser feel unwelcome (I understand they are protecting themselves against the ravages of the FSA); there are many products that are unobtainable except through an IFA.
It really shouldn’t matter that much how we explain to a client how they will pay. I would even question why we have to tell clients what they will pay to the adviser. Do you know how much the car salesperson took on your car; how much the builder took on your house; what the mark up was on the suit you bought?
If the market were on a genuinely commercial basis the client would have a range of options – I’ll pay a fee; I’ll remain ignorant and let you take commission; I’ll go to Nationwide to buy life cover and to Alan Lakey for pension advice. A long time ago there was a survey that demonstrated that the life companies used by IFAs had significantly lower charges than the direct selling companies. Competition did work. And in my opinion the market was a lot more innovative.
Now it’s a bit like going to Church and being castigated by the parish Priest for being unreformed sinners.
Read those responses again and see how introverted we have become under the Canary Wharf Taliban.
The client no longer matters – Long live the Process.

“Given the population is 62million that is less than 10% market penentration.”

The market for IFAs isn’t even close to 100% of the population. You need to strip out everyone who is too young, everyone who is either too intelligent or too stupid to seek advice, and most importantly, the vast majority of people in this country who do not have any spare savings or surplus income to advise on.

Once you have gone further and removed those who want to have a chat about their finances without having a bill shoved in their faces, 5 million potential clients sounds incredibly optimistic.

Sincere apologies for the bad layout and typing in my post (above). As many may know I rarely do my own typing. I do try to check was goes out, but in the past week the system failed. Being holiday season, it goes to show that not all temporary appointments work out!

I have just read Ken Durkin’s posts carefully.
I often find that I can agree with Ken, but on this occasion I really think he’s way off beam.

If you want to spend 30 minutes I can categorically demonstrate that fee charging IFAs DO exist.

Yes I sometimes use CAR, but equally (and perhaps more often) the clients write out a cheque. This is not only for investment business (how else would you get paid for advising on Investment Trusts and Bank Accounts for example?) but also for life assurance.

By the way – CAR does not have to rely on commission. After 2012 when (if?) the providers offer ‘clean’ contracts and investments the CAR charge is merely added (or subtracted) from the premium. So £100 CAR on £1,000 investment leaves a net investment of £900, or alternatively £1,100 leaves £1,000 – Simples! Same applies for life assurance – if you want to charge via CAR rather than a ‘clean’ and more cost effective fee.

Where CAR is often the better option is with pensions (providing you don’t hit funding limits) and the client then has the advantage of immediate tax relief on the fee (and HRT relief later).

Reading through the posts I can only conclude that there seems to be four main hurdles that some people find they are unable (or unwilling) to overcome.
1. They have no confidence in their own value to the client.
2. They lack the necessary commercial and communication skills to put the proposition forward.
3. They are so mired in the past with their reactionary attitude that they just will not consider the opportunities
4. They somehow believe that they have a social duty to provide advice to everyone and anyone that comes across their threshold and seem to overlook that they are a business

I agree Harry and I would add one thing. It appears to be a male thing, but why leave it to the last moment to move over to fees? We saw fees on the horizon five years ago, so why has Alan left it so late? (It is fairly obvious I would think – the RDR was never going to happen…) It is far easier to transition over to fees over time and if you lose the odd client over that period, so what? And at least you had commission to fall back onto if you really wanted to keep the client.
One further point, the FSA want advisers to provide advice. It is clear that this has been misunderstood by many here – they think a product must be sold together with commission and that constitutes advice. No it does not. Advice may lead to a product but the product is not the end game.

Please correct me if I am wrong, but to be called an IFA after the 1st January, 2013, you have to be “Whole of Market”.

The FSAs definition of WoM does not refer to a single market sector, ie investments or pensions, it refers to the fact that you must be able to advise your clients across the whole financial spectrum. So please tell me, all you investment specialists, who only deal with HNW clients, how are you going to keep your “independent” status when the RDR hits?

I am afraid that unless you are suddenly prepared to start advising on mortgages and protection, not to mention overseas property purchase, equity release, long term care, private health insurance, stocks & shares, general insurance (need I go on?), then you are all going to have to operate under the “Restricted Advice” banner. How are you and your HNW clients are going to like that, I wonder?

Educate educate educate – fee or commission it doesn’t really matter. The client needs to understand they have always paid a fee (albiet via the selected provider) through much higher upfront/ongoing charges on their investment which may have impacted on their returns.

In the long run paying a fee is a more cost effective option, they will save on charges which help towards better returns and enable advisers to move away from the free advice world!! In my eyes, if a client doesn’t want to pay for the advice do you really want them to be part of your client bank?

I thought all IFAs did this already – and althogh my firm does General Insurance – this is not part of the FSA specification for independence.

What makes you think that HNW clients don’t want mortgages or life assurance. The numbers are bigger – that’s all and often the life cover is for IHT mitigation. Overseas property is a common factor and who else but HNW can afford PMI?? And so forth. You must inhabit a very stange world.

I am very glad to see that you are offering the complete package to your clients.

My point, however, is that there are many IFAs out there who wouldn’t dream of getting ‘down & dirty’ in the less-than-glamorous world of mortgages and life assurance, and I am wondering how they are going to cope in the post-RDR world. Will they be prepared, I wonder, to take their CeMAP exams or Equity Release or Long Term Care exams or will they be happy to operate under the banner of “Restricted Advice”?

In your earlier post a day or so ago you mentioned that 20% of the client bank more or less paid for the other 80% because they were VHNW. How do they feel about that? I would have thought that the whole point of fee charging is that everybody is treated on a commercial basis exactly the same.

I agreed with most of your comments but right at the end you said something I disagree with:

There are lots of firms which believe they can remain independent by using one platform and 5 to 11 model portfolios. That’s not true.

I can see how you could come to that conclusion, but if having done your research into all possible products you then construct model portfolios that is acceptable. There are some firms that find themselves advising a niche type of client whose only differences are the degree of risk they are willing to take. Thus you could exclude investments that you consider too risky for the type of clients you advise.

The rules don’t suggest that you have to research and prepare a unique portfolio for each client, just be aware that some investments that may be unsuitable for one type of client, might be suitable for another.

Have you ever read “who stole my cheese” ? If haven’t you should it might help you adjust to these changes. Unfortunately for a number of years consumers have been ripped off by Banks and IFAs motivated by commission earnings and not best advice. In the case of the IFAs it may have been only a small number but nevertheless the industry itself took too few steps to address this. Now you find RDR forced upon you and many IFAs will have to change their approach to building relationships with their customers, firstly by demonstrating that their advice is valuable and worth paying for. As for the guy quibbling about tougher exams let’s hope he’s out of the industry come RDR.

Alan Lakey’s article is very valid indeed. I have presented fees to my clients with zero success. However, this point is of little importance compared with the concept of fee charging as a basic charging structure. If my clients paid £750 for an investment of £100,000 I would soon be bankrupt. The FSA’s “bright” idea of Fees will decimate the industry within 3 years. Quite simply, if I sold in 2013 EXACTLY what I have sold in the last 12 months I would have an earnings cut of about 45%. It’s time the FSA had a reality check. TCF ??? What about TAF – Treating Advisors Fairly.

It might be 3% now but in the 1% world that the FSA is aiming for the first half a million of investment business you write will cover your FSA fees, just, the next half a million might cover your PI and the next million your running costs, then you might earn something for yourself, oops forgot the taxman and the VAT. I am in favour of clients paying for advice and being treated fairly, surely it would have been a lot easier to remove any bias towards a high commission paying company just to cap the commission and charges an investment or life office could set. When I started in the industry some 25 years ago the maximum commission on a bond was 5%, it could be done but I fear the FSA cannot ride rough shot over the life offices so we became the easy target.

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